The grand experiment

On December 16, the California Air Resources Board is set to decide how to implement its “cap-and-trade” system for the state’s biggest polluters, including utilities, oil and gas companies, and major manufacturers.

It’s not the first carbon cap-and-trade system that’s been tried, but California’s will immediately become the second largest in the world—following the European Union Emissions Trading System.

And it’s just one part of California’s overarching global-warming law, Assembly Bill 32. The idea is to put a price on carbon emissions and to provide a “market mechanism” to encourage big polluters to get cleaner and more efficient.

Cap-and-trade schemes are generally supposed to be business-friendly measures, though many business groups say A.B. 32 is going to the drive manufacturers out of state to low-reg utopias like Nevada and Texas.

Not true, says Dallas Burtraw, an expert on environmentalregulation and the electricity industry, and one of the lead researchers behind a new study on the likely economic impacts of A.B. 32 and various cap-and-trade scenarios.

It’s very costly for businesses to pick up stakes, and very costly to move their goods from Nevada or Arizona or Texas to where the customers are in California. “California is the eighth largest economy in the world. They would lose access to that market,” explained Burtraw, a former resident of Davis who now works for Resources for the Future in Washington, D.C.

Burtraw added that once A.B. 32 is fully implemented, the study shows a possible loss of four-tenths of 1 percent of economic activity in the state by 2020. “Overall, the effect on the California economy is going to be very small,” he said.

The study was commissioned by Next 10, a San Francisco-based nonprofit, nonpartisan research group. (These are the same folks who brought us the way cool California Budget Challenge, which can be found at

The study gets really interesting when it starts to break down the economic impacts of the different possible flavors of cap and trade.

CARB is so freaked out about being painted as anti-business that it wants to give pollution allowances away, at least at first, instead of requiring polluters to pay for them (see “Cap and giveaway,” SN&R Frontlines, November 11).

But the Next 10 study found that if the state were to auction off the allowances and return the revenue to taxpayers (through tax breaks or dividend checks), California would net 109,000 jobs. Not that many to be sure. But by giving the allowances away, California will actually lose a net of 120,000 jobs.

That’s because under either scenario, there will be some cost to businesses to comply, and some job loss. But a “cap-and-dividend” program would create a powerful economic stimulus. Citizens would receive the economic benefit of the cap-and-trade system. “And they are going to turn around and spend it in the California economy, and churn up economic activity,” Burtraw explained.

Burtraw says either way, the California experiment is a major step forward, even compared to the European system that went before it. “This really is of historic importance. It’s a big change.” And so the experiment begins.